Monday, July 25, 2005

Around The World in 80 Minutes

Oil service pioneer Schlumberger—for all the anti-French wisecracking that goes on these days (e.g. “France just raised its terror alert...from ‘Run’ to ‘Hide’”)—is one of the world-class acts of public companies, and has been almost since its founding back in 1912.

That’s right: in 1912—when armies still moved on horse-back—Conrad Schlumberger conceived of using electrical impulses to map rock formations below ground.

And this wasn’t some snooty France-only deal. Conrad and his brother began doing geophysical surveys in Romania, Serbia, Canada, the Union of South Africa, the then-Belgian Congo and the United States in 1923.

In fact, Schlumberger is probably the most international company I have ever come across in 25 years of doing this, and therefore one of the most interesting.

So a Schlumberger conference call is always worth a listen, if for nothing else than its ability to take you around-the-world-in-80-minutes.

But with the world in what feels like unusual flux, from Iraq to Russia to China to Venezuela and places in-between, the Schlumberger call takes on an especially value-added hue—and last week’s did not disappoint.

Rather than summarize the call in my “rambling and sarcastic” manner (thank you Business Week!), however, I am presenting here the most interesting, unvarnished dialogue from last week’s earnings call—with questions from Wall Street’s Finest and answers provided by ace Schlumberger Chairman and CEO Andrew Gould.

It needs no elaboration, although I have italicized the more potent comments.

Q: In the quarter here, you've posted over 40% incremental margins both looking at it year-over-year and sequentially for the oilfield. Given all that you see right now, do you believe that those kind of incremental margins are sustainable and for how long?

A: Let me put it this way, Geoff. I think that we still have considerable pricing power. I also think that we're starting to see considerable inflation in the system and it's a question of which one is going to go faster.

Q: Can you elaborate a little bit on the inflation comment and where you see that?

A: Not only in materials but even more importantly we're seeing it in the cost of labor now.

Q: And are you taking any new actions in regards to labor in—where you're getting labor from or anything else that—?

So we have put certain retention mechanisms in place. We have had a general salary adjustment fairly recently, so you know, we have to get that back in pricing.

Q: I wonder….whether or not the slowing in oil demand growth in China is a concern to you or not?

A: The demand thing doesn't worry me particularly, because you know, everyone is focusing on the IEA's [International Energy Agency] demand remarks in the last week or two.

No one seems to have focused on the supplier, and what is really interesting is if you look at the supply numbers for the first half year, the non-OPEC supply is about 1.2 million barrels a day below what the IEA currently has in their forecasts.

So you know, I don't think there is a significant elasticity being developed in supply demand for it to significantly affect the price.

Q: And a quick follow-up. Russian production growth has slowed dramatically.

A: Yes.

Q: Given that Schlumberger has more visibility into Russia than anybody, I was wondering if you could add some more color…?

A: We’ve always said that there are two factors playing. One is that we are moving towards the end of the period when it was easy to access the existing well stock that was drilled in the Soviet era, and to work that over and to produce more. Still possible—but a lot more difficult than it was three or four years ago.

And the second thing is…that people are reluctant to invest more.

Q: And Iraq? Any update…?

A: The last assessment was still that it was too dangerous for us to do anything.

Jeff MatthewsI Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

So Gas prices aren't totally inelastic after all, huh? :) I know some people that are buying boats a lot smaller than what they could afford (or what they would like) not because of the cost of the boat, but because of operating costs, namely gasoline. So this doesn't surprise me.

It was a great weekend....I was at Point Pleasant. Its a serious fishing, boating ( year around ) place..Local marine gas station is hurting . I'm going back down for week next month. I will talk with the people directly.

When it comes to energy investing, I'm smart enough to know that I'm dumb money. I was thinking about buying SLB (or at least the OSX) last week and didn't, and I kicked myself all weekend (though not too hard -- I owned QCOM and BRCM).

Are there books and/or sites and/or sellside pieces you'd recommend? I'm no fool -- I'm a CFA, worked semiconductor buyside for a few years -- but I don't know the energy food chain and I don't know what moves the stocks. Thanks.

I would also suggest reading analyst reports to begin learning the language, such as Finding & Development (F&D) costs, operating costs, capital costs, reserves (proved and probable with little emphasis on possible), recycle ratios and the like. It is not difficult, but it does take time to understand.

Not meaning to be flip, but the largest drivers, not surprisingly, are oil and gas prices. The challenging questions are, what are the appropriate prices to be used for your analyses? Short answer, if you believe that prices are headed higher and will stay there, then most companies are likely a buy now. If you believe that prices will revert to the mean, then most companies are overvalued at these prices. And if you believe prices will muddle between the two extremes, then it becomes more interesting.

With jucojames' comments and the ones above, you should be off to a good start.